Why Rajasthan will drive India´s solar revolution

The share of India´s renewable power in total installed generation capacity is increasing steadily in the country, and Rajasthan is playing a major role in that transformation, a report by CRISIL and UBM, titled ´Solar Surge - April 2016´ observes.

Supplementing its natural advantage of receiving the maximum sunshine in the sub-continent with a supportive policy framework for renewable energy investments, has poised the state of Rajasthan to house nearly 25-30 per cent of India´s total installed solar capacity within the next few years, according to the report. However, to realise its full potential the state will have to quickly improve the financial health of its distribution companies and expand its transmission and distribution (T&D) infrastructure. There are early signs of robust improvement in Rajasthan´s power sector, with the state setting up large solar parks with ready land and transmission infrastructure, and discoms signing memorandums of understanding under the UDAY scheme.

India´s solar capacity to grow to 60 GW The dominance of conventional energy in India´s power sector is increasingly being challenged by double-digit growth in the renewable energy space. By February 2016, the share of renewable energy in total capacity additions in India had risen to 13.4 per cent from 10.7 per cent in February 2012, much of it due to a surge in solar power installations.

In future also, solar power will underpin robust growth in the renewable energy sector. CRISIL Research expects India´s solar power installed capacity to grow tenfold to 59-60 GW in 2021-22 from ~6 GW in 2015-16; ground-mounted grid-connected projects are expected to account for ~79 per cent of total additions. The lion´s share, which is ~60 per cent of the total installed base, is expected to be located in Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, Gujarat and Rajasthan. From among these, Rajasthan alone will account for ~25 per cent (~17-18 GW) of the country´s total solar capacity.

CRISIL Research has prepared a state renewable energy (RE) attractiveness index that gauges the medium term investment attractiveness of states for solar energy projects. This is based on critical parameters like financial health of distribution companies, availability of transmission infrastructure, incentives offered, level of solar irradiation and comprehensiveness of the roof top solar policy.

While computing the aggregate score for states, each parameter was assigned a weight and the performance of the state under each parameter was assigned a multiplier. The weighted average score was computed and a potential state attractiveness score was arrived at. For instance, a 20 per cent weightage was given to the financial health of the discom as a large proportion of the new solar capacities are tendered out by state discoms and weak financial position could lead to payment delays for consumers.

Hence, states such as Gujarat and Maharashtra topped the list as their discoms are in a much better financial position, which is reflected in their gap on subsidy booked basis (Gujarat - `/Kwh -0.02 and Maharashtra - `/Kwh -0.12) and positive net worth (Gujarat ~`43 billion and Maharashtra - Rs.5.3 billion).

Although Rajasthan is among the top few states in India as far as setting up of solar energy projects is concerned, the financial position of its discoms is relatively weak, which could deter investments. Nevertheless, this is offset by high solar irradiation, availability of large tracts of land, both within and outside the solar park, as well as the proposed green energy corridors. Moreover, going forward, the state´s attractiveness is expected to improve further with the implementation of the Ujjwal Discom Assurance Yojana (UDAY) scheme, which will gradually improve the finances of discoms (driven by decline in interest costs, lower growth in power purchase costs and gradual drop in AT&C losses).

Rajasthan to be most favoured by supportive policies
Driving this spectacular run of solar power investments in Rajasthan is the natural advantage that it has of maximum sunshine (Direct Normal Irradiance or DNI levels of 5.5-6.5 kwh/m2/day) in the Indian subcontinent. The state has an annual sunshine duration of ~3,600-4,000 hours, in addition to large tracts of barren land and growing inter-state transmission connectivity to other regional grids via green energy corridors.

For plants with same DC (direct current) side capacity, sites in Rajasthan could yield higher plant load factors (PLF) of up to 20 per cent (which will produce ~1 lakh more units/MW) compared with plants in other solar-rich states in India, enabling developers to earn similar returns (equity internal rate of return) at lower tariffs (tariffs lesser by 30 paise/unit). Unsurprisingly, the lowest quoted tariff (`4.34/unit for a 70 MW solar photovoltaic plant) in India under the reverse bidding mechanism is for a project in Rajasthan. In addition, Rajasthan also offers a favorable policy framework to boost solar power installations in the state, by offering incentives to solar projects such as speedier clearances, land and transmission availability and various other tax incentives.

Solar power to lead capacity additions in Rajasthan
Rajasthan is a growing investment destination and electricity demand in the state is expected to grow at ~6.0-6.5 per cent per annum (pcpa) (economic growth rate at 11 per cent (at current prices: 2014-15) as per gross state domestic product). But with fewer new thermal capacities coming up, there is demand for renewable power plants. Demand will also receive a boost from the state´s plans to electrify 396 villages and 30 lakh households, that are still without electricity.

CRISIL believes that the demand
of power will rise considerably in future in the state, with greater electrification and implementation of works under IPDS (Integrated Power Development Scheme) and DDUGY (Deen Dayal Upadhyaya Gramjyoti Yojana) schemes.

Already, renewable energy accounts for 23 per cent of the state´s total power generation installed capacity of ~15,000 MW. Going forward as well, healthy power demand growth will support strong capacity additions in the state. In fact, the state government has signed memorandums of understanding with prominent developers for setting up solar plants and parks totaling ~20 GW, which is in line with the state government solar policy.

Due to the amendment in the solar renewable purchase obligation (RPO) norm under the national tariff policy from 3 per cent to 8 per cent achievement by 2022, Rajasthan will need an additional ~4 GW of solar capacity. Notwithstanding this, the state is expected to meet over 10 per cent of its energy requirement from solar power by 2021-22.

Rajasthan already has good inter-regional connectivity with other regional girds, which will allow more power to flow without any grid fluctuations. The state is part of the northern region grid, which is expected to have 144 GW of interregional transfer capability with western grid and 179 GW of transfer capability with the eastern grid by the end of 12th Five Year Plan (2012-2017).

Challenges exist; but state gearing up for resolution of issues
Although Rajasthan has a lot going for it in renewable energy, some factors prevent it from fully realising its huge potential. For one, the state´s discoms, the biggest purchasers of power in the state, are deeply in debt. The outstanding debt of discoms in Rajasthan as on Sept 30, 2015, was Rs.805 billion, which constrained their liquidity position.

This has delayed payment clearances to generation companies and reduced investments in augmenting T&D infrastructure, which will continue to restrict large capacities to come up in the state. However, Rajasthan has signed the UDAY scheme, so discoms in the state will be able to save Rs.3,000 crore annually in interest cost through a reduction in debt and reduced interest rates on the remaining debt.

One pitfall of rising renewable capacity is greater imbalances in the grid, necessitating a good mix of different kind of power generation plants, better scheduling of power, and improved transmission connectivity. Rajasthan is blessed with a large installed capacity and huge potential for wind energy projects, which will help in regional grid balancing as generation of solar and wind energy plants complement each other; and the state has already released forecasting and scheduling regulations, which proposes to create a qualified coordinating agency for all wind and solar generators connected to the pooling substation. Further it allows 16 revisions in the day ahead scheduling, with no deviation charges till 15 per cent error in forecasting.

Another factor that can derail the state´s renewable energy growth momentum is aggressive bidding, which results in delayed financial closure or loss of allocations. The capital cost of solar projects is Rs.53-54 million/MW, so CRISIL Research believes that a tariff of ~Rs.5.0-5.1/unit is required for healthy equity IRRs, for solar photovoltaic projects in Rajasthan. Consequently, projects bid particularly by smaller companies with power purchase agreement tariffs below `5/unit are likely to find it difficult to achieve financial closure.

Delays in transmission line additions will create bottle-necks and could result in backing down of power from renewable plants. Moreover, a large transmission project has a gestation project of 20-30 months whereas solar plants are commissioned well within 13 months. This causes delays in evacuation of power and financial loss to the developer. To maintain its attractiveness as an investment destination, the state needs to take adequate steps to improve the financial health of its discoms and develop its transmission and distribution infrastructure in a timely manner.